Harmonised European covered bonds in sight, but differences likely remain

  • The differences in legislation governing covered bonds among EU member states made it difficult for investors to assess credit risks, and accorded the same regulatory treatment to a diverse array of instruments
  • The harmonisation of European covered bonds aims to ensure principal structural similarity across the EU, with regular reporting, better supervision and clarity on cover pool composition
  • Discretion on the transposition of the Covered Bonds Directive to law means technical differences across credit risks in member-state covered bonds frameworks are likely to persist
  • The credit quality of covered bonds is driven by the creditworthiness of the issuer in addition to the strength of the covered bond legislation. Cover pool assets are strongly influenced by national preference.
  • The degree of macroeconomic impact and movements in house prices will likely mean the impact on the issuer and the cover pool is not uniform across EU member states.
  • As such, we do not expect covered bond credit spreads to converge across EU member states for now. This is further supported by the recent fragmentation in peripheral and German sovereign spreads following the ECB’s announcement of interest rate hikes.
  • Nevertheless, further reviews would build on this first step, likely leading to further uniformity in covered bond structures across the EU.

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Acuity Knowledge Partners

Acuity Knowledge Partners

We write about financial industry trends, the impact of regulatory changes and opinions on industry inflection points. https://www.acuitykp.com/